The Pros and Cons of Buying Down Your Mortgage Interest Rate: A Conversation with Josh
This week, I met with my client Josh, a first-time homebuyer who was excited about finding his dream home but a little overwhelmed by the mortgage process. We’d found a beautiful property that ticked all his boxes, but when we started discussing financing, he heard about buying down interest rates, but did not know what to do.
It was a great question, and I knew it deserved a thorough explanation. Here are some of the pros and cons, and how to find a realtor to sell your house if the time comes.
What Does It Mean to Buy Down Your Interest Rate?
I explained that buying down your interest rate means you’re paying extra money upfront, called discount points, to lower your mortgage rate. This can reduce your monthly payment and potentially save you a lot of money over the life of your loan. But, as with any financial decision, there are pros and cons to consider.”
The Pros of Buying Down Your Interest Rate
- Lower Monthly Payments
“Let’s say your mortgage rate starts at 7.1%, but you buy it down by one point, which could reduce your rate to 6.6%,” I explained. “That might save you $100 or more on your monthly payment, depending on the loan amount.”
- Long-Term Savings
Over 30 years, that lower rate could save you thousands of dollars in interest. It’s especially worth considering if you plan to stay in the home long-term. - Tax Benefits
In some cases, the cost of buying down the rate may be tax-deductible, though you should confirm that with a tax professional.
The Cons of Buying Down Your Interest Rate
- Upfront Costs
The biggest downside is the upfront cost. Each discount point typically costs 1% of your loan amount. For a $300,000 mortgage, that’s $3,000 per point. If you’re already stretching your budget for your down payment and closing costs, this might not be feasible. - The Break-Even Point
It’s important to calculate the break-even point. That’s how long it will take for your monthly savings to outweigh the cost of the points. For example, if buying down the rate saves you $100 per month and costs $3,000, it’ll take 30 months—two and a half years—to break even. If you sell or refinance before then, you won’t recoup the cost. - Other Financial Priorities
Sometimes, it’s better to use that money elsewhere, like boosting your down payment to avoid private mortgage insurance or saving for future home repairs.
What’s Right for You?
So, whether buying down your interest rate is a good idea depends on your financial situation and how long you plan to stay in the home.
So, how do we figure that out for your specific situation?
You will work with your lender to calculate the exact numbers for your loan. That way, you can make an informed decision that aligns with your goals.
Josh’s Decision
After running the numbers, Josh decided against buying down his interest rate. Instead, he used those funds to increase his down payment, which reduced his loan amount and helped him avoid private mortgage insurance. It was the best decision for his current financial situation.
As I told Josh, every buyer’s situation is different. Whether or not to buy down your interest rate depends on your budget, your plans for the property, and your overall financial goals. If you’re feeling unsure, I’d love to help you explore your options and find the right strategy for your needs.
Buying a home is one of the biggest financial decisions you’ll ever make, and having the right guidance can make all the difference.
Ready to take the next step in your home-buying journey or find a realtor to sell your house? Contact me, Kim Kaplan, and let’s make it happen together.